In the afternoon of May 20, 2009, the Monetary Policy Committee (MPC) of the Bank of Thailand surprised financial markets and most analysts by resolving to hold the 1-day R/P rate at 1.25 percent after four successive rate reductions decided at the past four meetings. KASIKORN RESEARCH CENTER (KResearch) believes that the end of recent interest rate downward cycle may have many implications for financial markets and the interest rate trend of commercial banks.
For the bond market, KResearch expects major market participants to gradually absorb news of the rising government bond supply, higher inflation rate and possible economic revival in 2H09.
For the Baht, KResearch views that the end of the BOT interest downtrend may be positive for the Baht, especially if foreign capital inflows continue. However, the BOT may, in the near term, be challenged by Baht's stability, i.e., they will have to oversee Baht movements for consistency with market mechanisms and economic fundamentals.
For commercial bank interest rate policy, it is of note that despite the very low deposit rates now, lending rates may be subject to factors such as credit extension vis-à-vis liquidity, borrowers' credit risks and competition in the market.
As the downward interest rate trend ends, one question likely to be raised will be how soon rates will begin to rise again. KResearch believes that the timing of rate increases will hinge primarily on the inflation rate as it applies to the BOT's inflation targeting policy. KResearch forecasts that some weak signs in the Thai economy (though, since the end of 2Q09, downside risks to growth have been receding) along with a negative, or low, stable inflation rate until 3Q09 may be favorable to the MPC's low policy rate in supporting the economy along with government economic stimulus efforts, particularly, in several months ahead.
Nonetheless, KResearch has assessed that the BOT may be challenged by the complex economic environment around the end of 3Q09, especially amid possible rising inflation. As economic recovery blossoms, monetary policymakers will be compelled to seek an appropriate policy rate, but their decision will depend largely on their perspective toward inflationary risk and the economic turnaround.